Government spending on health care, infrastructure is expected

SINGAPORE – India’s finance minister, Nirmala Sitharaman, will present the country’s annual budget for the new fiscal year, which begins on April 1, on Monday.

The growth prospects of South Asia’s largest economy remain fragile.

After sinking into a technical recession last year due to a long blockade to curb the spread of the coronavirus outbreak, economic data show some signs of an ongoing recovery. But India’s statistics ministry said last month that advanced data indicated that the economy was still down 7.7% for the current fiscal year.

The next budget “will have to walk with a narrow, thin rope that balances a path to consolidation, but not at the expense of restoring growth,” said Vishnu Varathan, head of economics and strategy at the Asia Treasury Department and Oceania from Mizuho Bank, a note from Friday.

The government faces growing challenges as the risks of a second wave of coronavirus persist. This includes replacing the millions of jobs lost during the national shutdown between late March and May, as well as farmers protesting agricultural reform laws. India will also have to address its fiscal deficit, which has exceeded the target due to the economic slowdown.

The next budget is likely to prioritize social welfare to address the economic consequences of Covid-19 and its impact on millions of Indians and find ways to regain growth. Economists expect the budget to focus on areas such as health care, housing, employment, infrastructure spending, as well as resource allocation to India’s mass vaccine.

The next budget will be dictated by changes in the economy due to the pandemic, according to Radhika Rao, an economist at Singapore’s DBS group. He explained that India is likely to bet on a K-shaped recovery, where some parts of the economy will grow while other areas will lag behind.

1. Health care

India is expected to increase spending to improve the health infrastructure of the country that fought to fight the coronavirus pandemic. Last year, it was reported that many hot spots of infection, including New Delhi, did not have enough ICU beds for patients with Covid-19.

In January, India also launched a mass vaccination program that aims to inoculate 300 million people in its first stage, mostly front-line workers over the age of 50 or in high-risk groups.

“Apart from making allocations for the vaccination program (0.2-0.5% of GDP, depending on how many are supported by the state), an impetus to expand the insurance plan throughout the country, strengthening welfare construction and accelerating the push for infrastructure, i.e. hospital beds and doctors population proportions will be a priority, ”Rao of the DBS group said in an email.

2. Infrastructure

Experts say the Indian government sees spending on infrastructure as an important way to foster job creation in an economy where millions are struggling to find work and revive growth.

“The new budget will increase funding for roads and railways, although it is likely to be well below the 40% that the Ministry of Roads, Transport and Roads wants to push,” said Akhil Bery, a South Asian analyst at the political risk consultancy Eurasia Group.

“Given the pressure on central and state government finances, the Modi administration will need to encourage more private investment to accelerate the deployment of infrastructure,” Bery said.

In December 2019, India set an ambitious target of building infrastructure worth 102 trillion rupees (about $ 1.4 trillion) over the next five years. But financing these projects is likely to be a challenge, both for the government and for banks facing tight loan books.

Bery said the government is expected to establish a bank to help fund port, live and electricity projects and merge them with India’s infrastructure financing company as the government is expected to provide the initial financing and involve foreign investors.

He added that the defense sector will also see an increase in spending due to ongoing border tensions with China.

3. Housing and employment

India could focus spending on the housing sector, especially in urban areas that could boost low-skilled jobs, Credit Suisse economists said in a report last month. The housing and construction sectors in India require a lot of labor and provide substantial employment.

Nilesh Shah, CEO of Kotak Mahindra Asset Management, told CNBC that the budget should provide a tax concession to support the construction and real estate sectors, while providing incentives to industries that have been hard hit. by Covid-19, such as hospitality and retail.

“The budget should focus on mobilizing resources by improving tax compliance, plugging holes in the tax loop and monetizing government assets,” Shah told CNBC via email. He added that it should “reassure investors with continued reforms to improve business ease in India and maintain the path of fiscal prudence.”

In December, taxes on goods and services in India grew unexpectedly by 11.6% over last year, in part due to intensified surveillance over tax evasion, according to reports of local media.

Rao, of the DBS group, said he hopes the budget can increase allocations to existing employment programs and programs to encourage hiring, as well as continue to provide credit guarantee systems and liquidity support to small and medium-sized businesses.

Last year, when India announced its fiscal stimulus measures, economists were not impressed. Some said the government had no room to afford the kind of heavy spending needed to boost the economy. A higher government deficit would probably have further affected India’s already weakened credit rating.

“Even at the height of the pandemic, the government had been cautious in stepping up discretionary spending and squeezing spending in non-stimulating areas to manage the deficit,” said Priyanka Kishore, chief of Economics of India and Southeast Asia at Oxford Economics, on CNBC.

For the next budget, “India must avoid the trap of a false choice between restoring growth and returning to a path towards fiscal consolidation,” Varathan de Mizuho wrote. “The latter is a lost cause without the former.”

He said any lasting attempt to reduce the government deficit must be anchored in a feasible and sustainable revenue path, which requires India to have strong growth potential. The strategy should be to phase out public spending in a way that “allows the private sector to sustainably regain momentum amid a more uniform recovery,” Varathan said.

Kishore said he expects the global fiscal deficit to shrink by 7.4% of GDP in the current fiscal year to around 6% next.